Deep-water ban sending ripples through Houston

Houston ChronicleMidland Reporter-Telegram

Published 7:00 pm, Saturday, June 12, 2010

Energy companies worry delay puts jobs, projects in jeopardy

By Brett Clanton

Houston Chronicle

It's far from the rage and fear many Louisiana residents feel as they watch the oil spill sully fragile marshlands and imperil the state's economy, but a quieter concern is brewing in offices and manufacturing facilities of Houston's energy community.

Oil and gas companies worry that future exploration and production in the deep waters of the Gulf of Mexico, a business that has been the driving force behind the city's vast energy economy for more than a decade, could be jeopardized by fallout from the Deepwater Horizon disaster.

A six-month government ban on deep-water drilling already has caused disruptions, forcing oil and gas firms to idle equipment and thousands of workers and scurry to redeploy them elsewhere. But even if the ban ends in November as scheduled, and it may not, Houston could feel the effects of the interruption long after.

Some of nearly three dozen deep-water drilling rigs affected by the moratorium are expected to exit the Gulf and land new multiyear contracts in Brazil and other deep-water hot spots. That could lead to costly delays on U.S. projects and endanger jobs at large oil companies and the hundreds of local businesses that support them.

In addition, uncertainty around the ban -- and new rules that inevitably will follow -- is making it difficult for oil companies to plan and budget for the future, and to reassure antsy investors.

"If there's ever any doubt this isn't just BP's problem or Transocean's problem, it should be pretty clear now it's an industrywide problem," said William Arnold, professor of energy management at Rice University.

BP leased the Deepwater Horizon from Transocean, which owned and operated the rig.

The industry hand-wringing comes after President Barack Obama on May 27 ordered 33 deep-water rigs to stop drilling exploratory wells and banned new permits to drill in water deeper than 500 feet for the next six months.

Lure of deep water

The suspension, the administration said, will give investigators time to determine the causes of the April 20 blowout at BP's Macondo well -- in mile-deep water off the Louisiana coast -- that killed 11 rig workers and launched the worst oil spill in U.S. history.

While environmentalists have praised the moratorium as a good start in moving the nation toward cleaner energy, it's a tough pill to swallow for Houston's oil and gas industry.

Along with the recent emergence of onshore natural gas shale plays, "the deep-water Gulf of Mexico was really looking like an important component of the future," Arnold said.

Though offshore drilling dates to the 1920s in the Gulf, development of deep-water fields only became feasible in recent years with improved drilling technology and exploration tools. Further expansion into the Gulf has also grown more attractive as oil companies face limited access to new reserves elsewhere around the world.

The trend came at a good time for Houston. Brought to its knees by a mid-1980s oil bust, the city's oil and gas industry began to see deep water as a path back during the 1990s.

That idea was reinforced in 1994, with the launch of Shell's Auger platform. Standing in 2,860 feet of water, a record at the time for a permanent drilling and production platform, the project highlighted how productive and profitable deep-water wells could be.

"That changed the whole economic picture of the deep water," said Tyler Priest, director of global studies at the University of Houston's Bauer College of Business. A year later, the U.S. Deepwater Royalty Relief Act, which reduced oil companies' development costs by waiving some required payments on oil extracted from federal waters, stoked further interest in the frontier area.

Then, Houston's energy sector got an unlikely boost from the Asian financial crisis in the late 1990s. With crude prices almost down to $10 a barrel, major oil companies began merging, and Houston became a logical spot for the newly combined BP-Amoco, Exxon Mobil and Chevron Texaco to establish headquarters for offshore operations.Their regional offices were consolidated in Houston, and a wave of service providers and equipment makers followed.

Offshore oil hub

Today, "you have to have a presence in Houston if you're in the offshore oil business," Priest said.

In 2001, U.S. offshore oil production in the deep water topped shallow-water oil production for the first time. By 2009, 80 percent of offshore oil production and 45 percent of natural gas production occurred in water depths in excess of 1,000 feet, and industry had drilled nearly 4,000 wells in those depths, according to the Interior Department.

Because the business is so concentrated in the area, Houston undoubtedly will feel the impact of the new deep-water drilling ban and whatever comes after it.

Last week, Houston oil field services giants Halliburton Co., with 2,200 workers in the Gulf of Mexico, and Baker Hughes, with 2,000, said they will relocate personnel to other regions while the ban is in effect, and rivals are likely to follow.

In addition, at least two independent oil and gas firms in Houston, Plains Exploration & Production Co. and Newfield Exploration Co., have openly questioned whether they should continue operating in the deep-water Gulf.

And major offshore rig contractors, including Transocean and Noble, said oil companies have invoked forcemajeure provisions to get out of rig-rental contracts in some cases worth up to $500,000 per day. The provisions allow parties to escape contracts after natural disasters, war or other major events that significantly disrupt business.

"Six months could be 50,000 jobs that either people get laid off or redeployed out of the region, which means their money is not being spent here," said John Hofmeister, former president of Shell Oil, who anticipates a "multiyear setback for hiring, employment and for spending" for the offshore industry.

Prior to the Deepwater Horizon accident, U.S. Gulf of Mexico oil and gas production had been seen rising to 1.76 million barrels per day by the end of 2011, up from 1.15 million barrels per day at the end of 2008 and just under 1.6 million barrels today, the U.S. Energy Information Administration said in its Short-Term Energy Outlook report in May.

'There will be costs'

But analysts with Wood MacKenzie predict at least 80,000 barrels per day of production will be deferred from 2011 to later years.

Farther out, tougher drilling regulations and longer permitting timelines could bring more delays and boost operating costs to the point that some deep-water projects are no longer economic, the U.K.-based industry consultant said.

Priest, however, doubts higher outlays for new regulations would be enough to keep oil companies out of the Gulf.

"There will be costs," he said, "but they will be nothing compared to what this blowout is costing them."